Get With The Plan: February 23, 2014

Sheila, 59, and Tammy, 63, married in December 2013 after many years of building a life together without legal protections. Now, the couple is looking to see what their retirement will look like together as a legally married couple.

Sheila hopes to retire in two years, and Tammy is already retired.

“I am unsure about whether or not I am going to be able to comfortably retire from my primary job in the next two years,” Sheila said. “I would like for my spouse and me to live without worrying about day-to-day bills, and be able to afford one trip abroad each year.”

The couple, whose names have changed, have saved $287,600 in 401(k) plans, $10,800 in IRAs, $5,000 in savings and $18,500 in checking. Sheila will also have a pension of $34,800 when she retires, while Tammy is already collecting her pension and Social Security benefits.

The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help the couple review their outlook and forecast their financial stability.

“Their goal is to have their mortgage and home equity loan paid off by the time Sheila retires,” Power said. “Based on their modest lifestyle, they should be able to pay down those debts without a problem.”

He says they should get a head start by paying off their home equity loan with the cash that’s sitting in the bank.

“They currently have approximately $23,000 in the bank earning nearly zero interest,” he says. “That money would be put to better use by paying down the $17,000 home equity loan, which is an interest-bearing loan.”

If they don’t want to do that, Power recommends they look to invest some of the money to try to earn a better rate of return than they are paying in interest on the home equity loan. Plus, based on their low mortgage and home equity loan balances, they are most likely paying more principal down than interest, so they are not getting much of a write off for income tax purposes, he says.

In his analysis, Power used a very modest after-tax retirement lifestyle of $62,000 per year increasing every year for inflation, based on the budget submitted by the couple.

“This is what they’re spending now including mortgage and home equity loan payments, so in reality they should spend less,” he said. “I kept their lifestyle higher so they can budget in spending more on vacations or potential unforeseen health care related costs.”

Power said they will have very strong cash flow in retirement. Between their pensions and Social Security benefits, they will have approximately $105,000 of gross income, so their after-tax income will be more than what they need to support themselves, he said.

Put it all together and they have a 100 percent probability of success, he said.

But like every financial plan, there is room for some improvement.

Sheila and Tammy say their risk tolerance is moderate, which Power says would usually mean an asset allocation of 50 percent equities and 50 percent fixed income/money market. But the couple’s portfolio is much more aggressive, with 68 percent in equities, 24 percent in fixed income and the rest in cash.

This is more aggressive than they need to be to reach their goals with the smoothest ride, he says.

Digging a bit deeper shows their portfolio isn’t as diverse as they may think.

They are heavily weighted in U.S. large-cap equities at 22 percent versus Power’s suggestion of 13 percent. For U.S. small-caps, they have 39 percent invested instead of his recommendation of 4 percent.

There are also problems with their fixed-income holdings, he says. They own intermediate-term bonds making up 23 percent of the portfolio, compared with his recommendation of 7 percent.

He says their intermediate-term bond exposure may surprise them on the downside if interest rates continue to rise. Having more of those bonds reallocated toward short-term bonds could help protect their principal against rising rates, Power says.

They should also make some moves on the equity side.

“They could spread those heavily weighted assets more evenly across other asset classes such as mid-cap, international equity and emerging markets on the stock side,” he says.

Power looked more closely at Sheila’s pension. He says both women have enough income on their own to support themselves if either one were to die, so there is no need for Sheila to consider taking her pension with a survivor option.

“In fact, taking the single-life pension option and having more income than they need would allow them to accumulate money in a health care expense account in case of unforeseen health care costs,” he says. “This account could come in especially handy for Tammy because she is unable to qualify for long-term care insurance.”

But Sheila should seriously consider a long-term care policy. Power says it would cover the potential gap of long-term care expenses her Social Security and pension will not cover.

“This would give the added peace of mind of not depleting assets if Sheila had a lengthy illness,” he said.

Power said with last June’s U.S. Supreme Court ruling that the Defense of Marriage Act was unconstitutional, same-sex married couples now have the same Social Security benefit choices as those of traditionally married couples as long as the state the same-sex couple lives in recognizes same-sex marriages.

Because they’re in New Jersey, they’re in luck, as the Garden State is one of the 17 jurisdictions that recognize same-sex marriage. So he recommends Sheila wait until age 70 to collect her Social Security benefits.

“Her benefit will grow by 8 percent per year for every year she delays taking the benefit past her full retirement age of 66,” he says. “This will ensure that she will leave the maximum survivor benefit for Tammy since Tammy would receive Sheila’s benefit in replace of her own.”

This would be an extra $8,000 to $10,000 per year in survivor benefits to Tammy.